A quick monthly budget review should be part of the farm office routine, says consultant Mark Coulman of J H Walter.
Use it to get advance warning on the effect of weather changes or price rises on your bottom line and do not allow the unpredictability of the industry to be an excuse for not budgeting, he says.
“The key thing is to use it at the right time. If you know what price you have to achieve to make a profit and what costs your business can handle, you eliminate the stress of trying to predict the market.”
Looking further forward, particularly after a poor season, a well-drawn budget can tell you how long it would take you to get back on track, he says. “If you budget for say, the next 12 to 36 months, you can see the effect in the short term and the long term.”
Mark Coulman’s quick budget tips
- If looking at last year’s figures to estimate this year’s budget, make sure you know why actual figures differed from budgeted figures, For example, the difference this summer between actual and predicted grain drying costs was due to good weather, so there is no sense in changing next year’s budget based on this
- Look at last year’s budget to see what things are actually costing and where savings can be made
- Relate actual cost over a period of time, such as a year, to unit cost and benchmark against industry standards provided by levy boards
- Do a profit-and-loss budget as well as a cashflow budget
- Do not be too optimistic when predicting yields and price
- Remember to include incidental costs such as licensing of vehicles or admin
- Don’t forget inflation
- When looking at last year’s performance, check every detail in the budget against the true performance – not just overall figures. For example, if prices rise compared to what is budgeted, farmers may wrongly put improved margins down to better management
- Do not lump all costs in together – making small savings in big costs can eclipse big savings in small, but equally important, costs
Farmplan’s Gill Caine says budgets can not only help to plan and monitor business performance, but can also help communication between different levels of management.
Those drawing up budgets need to remember not only direct costs but changes to the business that can affect the level of those costs – for example taking on more staff, she says.